Decoding Transaction Documents In Fund Raise

Jul 23, 2021

There are 2 crucial transaction documents for execution in the Fund Raise, namely: 1. Shareholders Agreement (SHA) 2. Share Subscription Agreement (SSA)

Shareholder Agreement is the agreement which defines the terms of investment and guidelines for managing the business post the investment including:

  1.  Investors Rights
  2.  Decisions requiring Investor consent
  3.  Financial Reporting
  4.  Board Composition
  5.  Founders’ Employment with the company , to name a few 

Share Subscription Agreement is the agreement which defines the broad terms of the transaction like:

  1.  Investment Amount
  2.  Number of securities being offered
  3.  Price and Terms of the securities offered
  4.  Individual investor details, Commitment Amount and Corresponding shares proposed to be issued. 
  5.  Conditions Precedent and Subsequent to the Fund Raise
  6.  Period for closure of investment and the treatment in case of non-closure

 As you can observe from the names of the agreement,

 • Share Subscription Agreement - Transaction oriented

 • Shareholders Agreement – Relationship between the company and its shareholders

 Sometimes the 2 documents are clubbed into a single document – Share Subscription and Shareholders Agreement (SSHA / SSSHA), though it is an acceptable practice for the initial rounds of fund raise simply from the ease and cost perspective. But as the company goes towards larger and more frequent fund raise it is suggested that they follow the practice of 2 separate documents. 

Why separate documents???

Having separate SHA & SSA enables ease in executing future transaction documents.

As the companies grow, they tend to raise funds more frequently via bridge rounds. Having separate documents enable the company to raise fund by:

  • Executing Share Subscription Agreement between the company, founders and the incoming investor
  • Making the incoming investor party to the existing Shareholders Agreement by signing a Deed of Adherence (DOA).

As mentioned earlier SHA covers crucial terms and each shareholder agrees to these terms by signing the SHA. Further, any change to the existing SHA or adopting a new SHA requires approval from all the shareholders. 

 The process of getting approvals is time consuming and often involves multiple rounds of discussions and negotiations between the existing shareholders, founders and the new investor pertaining to the terms of the investment and other commercial understandings covered in SHA. Also, it would require signatures of all the shareholder of the company, thus making the turnaround time lengthier and execution difficult.

On the contrary, having a separate SHA enables the company to sign a SSA & DOA between the company, founders and the incoming investor making the process:

  • Cost Efficient - SSA & DOA are standard documents and available as templates. On the other hand, SHA is a complex document and needs to be drafted as per the requirements of the shareholders of company by a legal counsel.
  • Time Efficient – Does not need consent and signatures of each investor 

Additional Documents part of transaction documents in Fund Raise

Besides the SSA & SHA, there are few more documents executed on case-to-case basis:

  • Share Purchase Agreement (SPA) – Executed where the transferor is an existing shareholder of the company, also known as Secondary Transaction.
  • Deed of Adherence (DOA) – Mentioned above as well, DOA is a document by signing which the incoming investor agree to adhere to the terms set out in the existing SHA. 
  • Addendum to the SHA – Many a times the incoming investor may agree to majority of the clauses in the SHA but may require certain changes, thus in that case instead of signing a new SHA, addendum to the existing SHA is executed. 

This document refers only to the clauses which need modification while mentioning that all other terms and condition of the SHA to apply as it is. 

Addendum is cost effective as compared to the SHA as it is a short agreement with limited clauses being referred but would still need a legal counsel to draft the same. Addendum may or may not be time effective as it depends on the 'Amendment" clause of the existing SHA.

As we move forward, we would be covering the clauses of the SHA in greater details and how the same can be used by the founders and investors to ensure efficiencies with respect to time and money spent on documentation for the future fund raise. Stay tuned with Auxano to know more!!!!

Conclusion: It would be suggested that the founders insist on having a separate SHA & SSA as they move onto raising funds from institutional investors. 

Having separate documents do add to the efforts in the beginning but in the longer run they make process of executing transaction documents easy, quick and less expensive...!!

Author(s) :
Karan Gupta